A major development of the new Companies Act, which came into legal force on May 1, is a business-rescue procedure that aims to rehabilitate companies in financial distress. A court order for business rescue can be sought by any stakeholder in the company.
The company can then nominate a business-rescue practitioner (BRP), who will take over all company affairs, although the director will remain in his/her position. Two or more people can be appointed jointly.
The Act says the BRP must be:
- In good standing with a regulated profession;
- Not disqualified to be a director of a company;
- Not under probation; and
- Not in a relationship with the company that would compromise the practitioner’s integrity or impartiality, or related to such a person.
The practitioner will investigate the company’s affairs and decide whether there is reasonable expectation of rescuing the company. If not, the company will be liquidated. If the company can be rescued, the BRP will prepare a business-rescue plan that is later voted on by creditors. If the majority accept, it is binding on all affected parties. “The Act tries to motivate creditors, bankers, employees and suppliers to support the company to keep doing business with the company while it is under rescue,” said Danie Potgieter of Danie Potgieter Attorneys.
“The parties that maintain a business relationship with the company while it is under rescue become preferential claimants for the money which became due to them after commencement of the rescue.” The BRP can be removed if the applicant can prove the practitioner lacks the necessary skills, is not independent of the company or does not comply with the requirements. The court will then appoint another practitioner.
Potgieter referred to the new procedure as “debt counselling on steroids”.
The business-rescue plan, he said, can take many forms which might include a total or partial restructuring of the company’s affairs, property, business, shares and shareholding, debt, operation and equity, to make the company commercially viable and to create a better result for creditors and shareholders than an immediate liquidation would bring.
Potgieter has been involved in rescuing companies for more than 20 years and teaches insolvency law at the University of Pretoria. He said the business-rescue procedure was not all that different from the judicial management process under the old Act, which also aimed to make an unprofitable company profitable again.
The latter was an effective mechanism, he said, although underutilised. “Most attorneys and businessmen are unaware of its existence.” The biggest difference, he said, is that, under the old Act, rights of surety were not protected. Although all legal proceedings against a company were stayed, creditors would go after suretors.
Practitioners appointed to the task of rescue had to be on the masters’ panel and usually had experience in liquidating companies. “With all due respect, most of them don’t know how to rescue a company,” Potgieter said. “There is more in it for them to liquidate the company.”
Potgieter said the new business rescue procedure was a good mechanism. “I believe it must be given a chance.” But he noted that there was potential for it to be abused by companies in deep trouble who simply want to buy time.
Should the creditors vote against the adoption of the rescue plan, however, the BRP must immediately file a notice with the Companies and Intellectual Property Commission (CIPC) of termination of the rescue procedure and commence liquidation.
“It is worrying that the company is placed wholly in the hands of creditors,” Potgieter said.
“I don’t think they always come with an attitude of saving the company. They are interested in their own finances.”
But the chief executive of the Turnaround Management Association, Sandile Hlope, said it was up to the BRP to motivate creditors to save a company. “If they liquidate, they could get 30c for every rand owed, but on rescue, they could get 80c to the rand.”
Under judicial management, Hlope said, the process could drag on for years and creditors might never be paid. “The new Act gives them a voice and a say.”
The problem, Potgieter said, is that “businessmen who are successful don’t have the time to rescue companies”.
Hlope, said his practitioners had years of experience in informal business-turnaround procedures and often did not even go through judicial management. Although no BRPs have yet been appointed, Hlope said many turnaround managers had completed the prerequisite forms.
Others who are expected to come forward are those with legal, accounting or business-management experience. “Liquidators would also qualify because the Act states that a BRP is not allowed to liquidate the same company once [it is] taken off rescue.”
Elsabe Conradie, the spokesperson for the CIPC, said the commission had received a few applications from individuals to be appointed as business-rescue practitioners. “The applicants come mainly from audit firms that have previously engaged in corporate renewal and turnaround-management strategies. No licences can be awarded yet as not all the required information accompanied the initial applications.”
A practice note and information on the filing of requests to be licensed as a business practitioner will be made available on the website to complement the provisions of the Act.
Act imposes social responsibility obligations on companies
The new Companies Act effects numerous changes for businesses and provides for stricter accountability and transparency requirements for state-owned and public companies. Bowman Gilfillan attorney Carl Stein told the Mail & Guardian the Act had brought about two significant changes, philosophical and structural.
“The Act says that a company is integral to society, therefore companies have as great a responsibility to society as does a natural person, [and therefore] have to be good corporate citizens,” Stein said. The 1973 Act “was a totally capitalistic model and the director’s sole objective was to benefit shareholders”. But now “the director has to take account of the interests of shareholders as well as all other stakeholders”.
This philosophical approach, Stein said, resulted in large structural changes to the Act, including greater obligations for social responsibility. For example: the Act states that the minister may prescribe that a company or a category of companies must have a social and ethics committee, if “it is desirable in the public interest, with regard to its annual turnover, the size of its workforce or the nature and extent of its activities”. Additionally, Stein said, more powerful rights and remedies have been given to employees and trade unions.
This move, Stein said, could make the administration of small businesses complicated and costly and have a profound effect on the economy. Regulatory analyst at Deloitte, Johan Erasmus, told the M&G the new Act was an extremely positive development. “Government from the word-go said the intent was to make things easier and that certainly has happened.” The old Act of 1973 undoubtedly needed a shove into the 21st century and practical changes, such as allowing for electronic meetings in the definition of “being present” at a meeting, have been introduced. And only public companies are now obliged to hold annual general meetings.
The Act has been decriminalised. But now a noncompliant company can be held liable by any shareholder who wishes to claim loss or damage. The registration of close corporations is no longer permitted. Now all companies, large or small, are governed by the same piece of legislation, Stein said, which is a bit of a gamble.
“The new Companies Act will not replace the Close Corporations Act but complement it,” said Elsabe Conradie, the spokesperson for the Companies and Intellectual Property Commission (CIPC). “No new CC will be registered, but all existing CCs will be maintained. The enforcement and remedies created in the Companies Act will be applicable to close corporations.”
Erasmus cites the need for special resolutions as particularly problematic at this stage. A special resolution is required to amend the company’s memorandum of incorporation to the extent required (to line up with the new Act); to approve the voluntary winding-up of the company; or approve any proposed fundamental transaction. A company’s memorandum of incorporation may also require a special resolution to approve any other matter not mentioned in the Act.
“Many companies do not have it on the books and now it is a problem,” Erasmus said. She said more preparation time was needed. “I get the logic, but today many companies have a problem with this. People didn’t take it seriously with all the postponements. Quite honestly, we were waiting for the amendment Act, which was signed days before the Act came into effect.”
The transitional period for implementation is two years and applies to everything, Erasmus said, except anything pertaining to shareholder rights, director conduct and liability, and fundamental transactions, such as mergers in which companies must comply with the procedures prescribed by the new Act.
During this period, any clash between the company’s memorandum and the Act means the memorandum will take precedence until it is in line with the Act or until the transitional period has ended. Erasmus believes this will trip up many companies, which will have to comply with the restrictive requirements of the memorandum should a clash occur. “It is in a company’s best interest to change as quickly as possible,” she said, otherwise they will not be able to participate in all the “good things” the new Act has brought about.